Bringing Up Baby: Diapers, Life Insurance and College Savings

A baby can bring joy, wonder—and a hefty hit to your finances. According to BabyCenter’s 2011 report, the average cost of raising a child is $226,920.

Consider the expenses you may face. There are the health care costs not covered by insurance. You might need a larger home and more life insurance, and you may want to start a college fund. And, of course, there’s baby food, bottles, clothing, diapers, toys, a crib, a changing table, a car seat and a stroller.

To be sure, you may get some of the baby paraphernalia as gifts, or it might be passed along by other parents. Still, the costs can add up fast, and you may not have the time to be a careful shopper because you’re devoting yourself to your new baby. Moreover, you may be paying all these costs with less income because one of you has quit your job.

Some of the financial challenges of a new baby are unexpected—much like the challenges of child-rearing. But you can take steps before and after the baby arrives to make the financial side of parenting a little easier:

Start saving. Try to get a head start by putting some money aside. If you’re both working and one parent is planning to stay home indefinitely after the baby arrives, you might practice living on one paycheck and using the other paycheck to boost your savings.

If, after all your other added expenses, you can afford to put something aside each month for your new child’s college education, consider a tax-advantaged account.

Estimate expenses. Jot down all the one-time and recurring expenses that you will face, and then figure out whether these are manageable—or whether you need to trim or eliminate some costs.

Look into company benefits. Many companies have a range of benefits that can help cover pregnancy, childbirth and parental leave. While employers may be required to give you time off under the Family Medical Leave Act, they aren’t required to pay you during that time. If they do pay, the percentage of salary—as well as the length of time this pay continues—can vary from firm to firm. Find out how much it might cost to add a new child to your employer’s group medical coverage. If your employer offers a pretax health savings account, consider funding an account or upping your existing contribution. According to the IRS, a family can contribute up to $6,150 to a health savings account in 2011, although some companies may have lower limits.

Check your life and disability insurance. Even if you have life insurance, it may not be enough to provide for your now-growing family. You may want coverage equal to five times your annual salary and possibly more. The exact amount will depend on factors such as your income, your current level of savings, and how much mortgage and other debt you have. You may also want insurance on the life of a nonworking spouse, since his or her death would likely mean significant expenses for child care and other costs. In addition, consider disability insurance to replace some income in case you are injured and can’t work for an extended period. Your employer may provide short-term disability coverage at little or no cost. These plans typically cover 60% of your salary, and you may be able to extend that coverage by paying an added premium. You might also consider buying a supplemental policy on your own.

Start a college fund. If, after all your other added expenses, you can afford to put something aside each month for your new child’s college education, consider a tax-advantaged account. If grandparents or other relatives want to help, you might suggest they establish their own account for the child’s benefit or contribute to the account you set up.

Don’t neglect your own retirement. While a decent-size college fund can be a great help when your baby turns into a college-bound teenager, keep in mind that you may also be able to pay college costs with loans and grants—and that you still need to fund your own retirement. If you have a 401(k) or similar retirement savings plan at work, make sure you contribute at least enough to qualify for the employer match.

Name a guardian. You probably had a will even before you had a baby—but now it’s essential. Both parents need wills that name a guardian in case you both die prematurely. Your will should also specify that money bequeathed to the baby should go into a trust. You may want to name one person to take care of your child and someone else who is better with money to handle the finances.